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Monday, 17 September 2012

But what’s it really like to set up in China?

In my last post, I considered why western investors and
start-ups should place China
at the forefront in their overseas expansion plan; now, let’s look at what it
is like to set up there. There are several characteristics of the start-up
scene in China
that differentiate it from any other region in the world. These are summarised
as follows:

1. There is a need for the older generation
within managementKevin
Dai founded Comsenz in 2002 as a software company tasked with providing
solutions to the inefficiencies introduced when blogging and community sites
integrate several complex features within themselves. In speaking about his early
days in the company, Kevin spoke of the importance of hiring older more
experienced senior managers in order to sustain expansion of the company. This
is because China
is a traditional hierarchical society, and young people are expected to defer
to the older generation and not to be their bosses – even in start-ups!

2.Labour costs are relatively lower than
those in Silicon Valley and EuropeChina’s labour costs are still significantly
lower than those in USA and
in Europe, which would prove to be especially beneficial to young start-ups
that require just as much talent as Silicon Valley,
but have much fewer resources. For example, the mobile antivirus application
maker TrustGo has 4 employees in US and 40 inUSA where software development is
done.

3.People do not pay for softwareCompanies
such as Microsoft which depend on selling their software would find it
difficult to survive in this market. The young Chinese internet users very
rarely give up their money to buy original software, but will spend their money
on physical goods and online games. It is these two latter revenue streams that
start-ups should plan to depend on, in addition to other more creative sources.

4.Competition is more than fierce – it’s
incredibly brutalThis
point is especially illustrated when one considers the fact that there exist
anywhere between 3000-5000 Groupon clones in China alone. With every new and
profitable revenue model developed anywhere in the world, one can be certain
that it shall be mimicked in China.

5.Setting up a company in China is
extremely difficultIncorporating
a company in China
is very difficult, especially for foreigners, and for companies hoping to raise
funding in dollars. For the latter, other than QLFPs the most recommended
method for raising dollar funds is through Variable Interest Entities (VIEs).
This involves setting up a company in the Cayman Islands that controls a
subsidiary in Hong Kong, that controls a foreign subsidiary in China, that controls a local subsidiary in China.
A start-up also has to acquire the Chinese Internet Content Service Provider
licence and must set up trusts for employees in order to grant employee stock
options.

6.Start-ups are deprived of online developer
services and technology-infrastructure is outdatedThere
are several services which are taken for granted in the West, such as AWS,
Heroku, Sendgrid, Twilio, Brain Tree, GitHub and Google Apps that are not
available in China.
In China,
start-ups must manage their own hardware and may even have to build their own
email servers.

Furthermore,
several Chinese start-ups are still on .NET and php while most start-ups in the
West are fully utilising Ruby on Rails and Node.js for Pc internet development.
This is not as problematic for mobile internet development where Google and
Apple have standardized their development tools through Android Developer and
iOS-XCode.

7.Beijing is the hottest start-up spot …Beijing has a brilliant talent pool and its main start-up
hotspot, Zhong Guan Cun, is located next to China’s
finest universities: PekingUniversity and TsingshuaUniversity.
These advantages have made it 10 times bigger than its closest rival Shanghai.

8.… but Shanghai
has better deal-flowShanghai is China’s financial capital and this
fact is not lost to VCs and Private Equity who have set up shop in the city. If
start-ups are looking to deal flow, they shall have to set up a base in this
city.

9.The China VC market is very largeWith
the Chinese economy performing so strongly over the past decade, VC fund have
grown extremely large making China
the second biggest VC market outside of the USA. While the money is plenty,
start-ups shall have to acquire the right connections to access these funds.

10.The local start-up mentality places low
chances on their company’s acquisitionBecause
intellectual property law is still in its infancy in China, start-up ideas are very
easily stolen and mimicked by large established players. As such, the mentality
of most start-ups is to focus on sustaining their company towards an IPO, or on
maintaining the business as a lifestyle choice.

Both these opinions reveal that
Chinese start-ups do not place much faith in big payouts through acquisitions,
and even IPOs may be muted due to the threat of mimicking one’s products and
services. This also has several implications with regards to employee
remuneration: in China,
employees seem to prefer big salaries over high equity, and are in many times
more willing to work for large established names than to work for start-ups.
The latter is also because Chinese culture is one that favours stability, and
the older generation tends to push younger graduates to avoid the risk of a
start-up job.

11.Incubators tend to house start-ups for much
longer than would be expected in the WestThis
fact is a result of the Chinese culture, which dictates that adults should live
with their parents until marriage. In this case, the incubators are in a sense
the parents of the start-ups, and it is common place to meet teams of 30-40
people that are still housed in the incubators that they were conceived in.

12.Chinese talent seeks respectable working
environments despite the start-up’s ageWhile
US start-ups are more than comfortable renting out garages and scrappy offices
in their infancy, start-ups in China
have to be a lot more conscious about their appearance and the buildings in
which their offices are housed. Chinese engineers do not want to work in home
offices or scrappy surroundings, which forces start-ups of any age to hire out
beautiful offices that would be expected of more established companies in the
West. Chinese talent is also well known to have a high turnover, which is
driven by the benefits and packages offered by competitors. With the wealth of
opportunities in China
and the need for qualified talent, companies are very worried about hiring while
most employees are not worried about getting hired.

13.Chinese New Year is the time to quick, and the time to get hiredThe
Chinese New Year has become the time to quit because most bonuses are paid out
at this time, after which opportunistic employees leave their firms. On the
flip-side, it is also the time to get hired because several openings suddenly
become available for new recruits!

14.There is a lack of good management in ChinaChina is still
an emerging economy and its business environment still shows many signs of
infancy. One of these signs is poor management of businesses on the continent.
This affects not only the small start-ups, but several other large established
companies. One recent example is that of Sina Weibo, which accepted too many
short-term debtors in a famous case of Working Capital mismanagement.

Why not join us at
our upcoming place4BRICs networking event to discuss your interests and the opportunities in China and other emerging markets.

9 comments:

Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me. BY - software development

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